Microsoft remains a top-notch dividend stock

The software giant has morphed into one of the world’s biggest dividend payers.

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This article was originally published on All figures quoted in US dollars unless otherwise stated.

After the dot-com bubble burst in 2000, many investors viewed tech stocks with a skeptical eye. Full of promise yet with little follow-up, profitable tech stocks were few and far between. Even worse, losses were commonplace. But Microsoft (NASDAQ: MSFT) rose from the ashes of the dot-com bubble with heaps of cash, proceeding to pay its first dividend in 2003. Since then, the tech company has managed to increase both its stock price and its dividend payout by leaps and bounds. Thanks to a combination of strong revenue growth, fast-growing profits, and consistent annual dividend increases, the software giant has become a must-have for many dividend investors -- and the company's latest dividend increase reiterates its strength as a dividend stock.

Microsoft's dividend: The details

Earlier this month, the $2.2 trillion-dollar tech company announced an 11% increase to its quarterly dividend. It's payable on Dec. 9 and to shareholders of record on Nov. 18. The new quarterly dividend of $0.62 comes out to $2.48 annually, giving Microsoft a dividend yield of about 0.8%. Impressively, the dividend hike actually marks an acceleration from the 10% dividend increase the company announced in 2020. In conjunction with its dividend increase announcement, Microsoft's board of directors also approved a $60 billion share repurchase program. This gives the company even more ways to return cash to shareholders -- albeit indirectly in the form of buying back shares and thus increasing shareholder ownership in the company. The robust dividend hike and Microsoft's new share repurchase program together reflect the strength of the software company's underlying business and its recent performance. Microsoft's revenue for fiscal 2021 (which ended on Jun. 30, 2021) rose 21% year over year to $46.2 billion, while net income grew 47% to $16.5 billion.

A dividend-paying powerhouse

The company's double-digit dividend increase helps drive home why investors shouldn't search solely for dividend yield when looking for dividend stocks to buy. They should also consider the growth prospects of a company's dividend. Sure, Microsoft's dividend yield of less than 1% may seem unappealing at first glance, but investors should realize that it's likely the software giant's dividend growth will average a growth rate of approximately 10% annually for the next five years. With tailwinds of strong top- and bottom-line growth and dividend payments currently accounting for less than one-third of the tech giant's total annual earnings, there is substantial room for upside in Microsoft's dividend payments.

This article was originally published on All figures quoted in US dollars unless otherwise stated.

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Daniel Sparks has no position in any of the stocks mentioned. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Microsoft. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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